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FRB Vice Chair Explains Plan for Tailored Banking Supervision

Board of Governors of the Federal Reserve System (“FRB”) Vice Chair for Supervision Randal Quarles advocated for a more tailored approach to supervising banks.

In an address before the American Bar Association Banking Law Committee Annual Meeting, Vice Chair Quarles discussed the need for increased efficiency and transparency and identified several measures the FRB is taking to improve the regulatory regime. Among them are appropriately recalibrating the capital and leverage ratio rules and reforming the Volcker Rule. Vice Chair Quarles shared that the agencies are collectively working on a “Volcker Rule 2.0” proposal. He indicated the Federal Reserve is committed to a continued review and refinement of the resolution planning process and stress testing program.

Vice Chair Quarles explained that the FRB will tailor supervision to the “size, systemic footprint, risk profile, and business model” of banks. He said that the goal of such supervision is relevant to both small, mid-size and big banks. He reported that the FRB is supportive of raising the $50 billion statutory threshold for application of enhanced prudential standards or implementing an approach that takes into account other factors besides consolidated assets. Vice Chair Quarles called for more appropriate calibration of liquidity requirements for large Global Systemically Important Banks (“GSIBs”) as opposed to large non-GSIBs.

Vice Chair Quarles also stated that the FRB will revisit the “advanced approaches” thresholds that are used to identify the internationally active banks subject to certain risk-based capital requirements and Basel Committee standards. He added that he is not “advocating an enervation of the regulatory capital regime applicable to large banking firms.”

Separately, Vice Chair Quarles indicated that the Federal Reserve is “rationalizing and recalibrating” the concept of “control” as used under the Bank Holding Company Act, given that the standard has become somewhat ambiguous even though “a determination of control under the [Bank Holding Company] Act is significant because even remote entities in a controlled group can be subject to the BHC Act’s restrictions on activities and a host of other regulatory requirements.”

Vice Chair Quarles said that post-crisis reform has largely resulted in a stronger and more resilient system. He asserted that new efforts by the FRB will result in significant progress in the “areas of core reform” (capital, liquidity, stress testing and resolution).